Handwringing Over Trump’s Debt Comments Misplaced

By Robert Pickup, on May 14th, 2016

Donald Trump’s comments on how he would handle the national debt sent shockwaves trough the financial pundit class and the Never Trumpers. During an interview on CNBC’s Squawk Box, when asked if he would renegotiate the debt said “I would borrow knowing that if the economy crashed you could make a deal.”

In an article that typified the shocked response from the financial press Danielle Kutrzleben writing for NPR fretted that “suggesting that U.S creditors accept haircuts on U.S debt would be an unheard of potentially disastrous policy.”

No explanation is given, other than the United States hasn’t done it before, as to why it would be unheard of. Many other nations throughout history have and it is occurring right now in Greece. Since the U.S isn’t an exceptional nation, as the President has reminded us many times, it wouldn’t be unheard of to pursue such a policy in a similar situation.

Further, she tells us that “the prospect of investors in U.S debt accepting less on the dollar than they are owed could tank the economy.” This is a moot point because Trump said any deals would be made if the economy had already crashed. If the U.S ever found itself in the position Greece is in our creditors would be stupid not to accept any haircuts to avoid a full default.

Kurtzleben also makes the point that this talk about renegotiating our debt could cause interest rates to soar on our Treasury’s, making it more difficult for the Federal government to borrow. If raising interest rates are the kick in the pants DC needs to take our debt seriously and get our spending under control so be it.

While these financial pundits are wringing their hands over voluntary buyers of bonds not receiving what they are owed, we are approaching the same situation with our mandatory social security contributors. According to the Social Security trustees, the 75 year unfunded obligation of the Social Security trust fund is $12.2 trillion.

The Heritage Foundation says that if no action is taken benefits will either be delayed or reduced across the board by 23%. Where is the handwringing over Hillary Clinton wanting to keep the status quo or Bernie Sanders who wants to expand its coverage and benefits?

To add insult to injury the Supreme Court decision in the case Flemming v Nestor upheld Congress’s ability to modify the program, for example cutting benefits, declaring that individuals don’t have a “ property right” to their benefits regardless of how long or how much they paid in.

In the event of a possible default, the U.S government is going to treat bondholders exactly like Social Security beneficiaries. They will delay payments, negotiate payments less than the principle and inflate the currency to erode the value of the Debt making it easier to pay. Pundits shouldn’t be attacking Trump for saying how he would try to discharge our massive Debt but those in DC who have amassed it.